Inflation and home prices

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Real Estate

The latest figures released this week revealed that current inflation remained at historically low levels. The Consumer Price Index (CPI) is a widely followed monthly inflation report that looks at the price change for goods and services. In February, Core CPI was just 1.3% higher than a year ago, down from an annual rate of increase of 1.4% last month and 2.3% in February 2020.

Despite this tame report, however, some investors are worried that inflation may increase significantly later in the year. As the vaccine rollout progresses, pent up demand in areas such as travel may be unleashed, causing prices to spike. Rising inflation reduces the value of future cash flows from bonds, so it is negative for mortgage-backed securities (MBS) and thus mortgage rates.

These concerns about future inflation have caused global bond yields to climb significantly this year, but two major central banks have taken different stances on the appropriate policy response. Last week, US Fed Chair Powell acknowledged the strength but did not give any indication that the Fed intends to attempt to restrain long-term bond yields. According to Powell, increases in inflation from stronger economic activity likely will be just "transitory” in nature, and the central bank will be "patient" before changing monetary policy. By contrast, the European Central Bank (ECB) announced on Thursday that it plans to increase the pace of bond purchases "significantly" going forward to help stabilize yields and boost the economy. One reason that the ECB may feel more pressure to loosen monetary policy than the Fed is that the eurozone is projected to grow around 4% this year compared to a much stronger 6.5% estimate for the US.

Although we can not possibly know with certainty what the stimulus payouts will do to house values, we can look back to history and see the patterns. Typically the cycles have been 5-8 years of increasing values followed by a dip. The economic forces that drive inflation mentioned above will undoubtedly cause interest rates to rise followed by a decrease in demand for homes.

How does this affect YOUR HOME VALUE?

Decrease in demand will lead to fewer multi-offer situations leading to homes selling for lower prices. Demand in this scenario does not necessarily mean that fewer people Want to move it means that buyers will be knocked out of the buying pool by the higher interest rates. 

If you are considering selling in the next 3-5 years, it is a great time to contact a real estate professional to get an accurate price. NOT A ZESTIMATE, which can be inaccurate by as much as 30%.

GET your Price here

Posted by Debi Hauer, Realtor

Jack Conway Realty- 781-783-2963